Decreasing Term Insurance
The Dictionary of Insurance Terms and Definitions
With decreasing term life insurance, the death benefit offered decreases over time. The longer the policy is in force before paying out, the lower the death benefit will be. The decreasing benefit makes for more affordable coverage.
The rationale behind decreasing term life insurance is that individuals' life insurance needs tend to decrease as their lives progress because liabilities decrease: children leave home, and spouses have fewer years ahead of them. Because it does not maintain its initial, high death benefit, decreasing term life insurance is more affordable than ordinary term insurance.
Like ordinary term life insurance, decreasing term insurance remains in force for only a certain duration, and if the insured does not die before the term of coverage is over, the policy will not pay out any death benefit at all. If the insured dies while the policy is in force, the life insurance company will pay the prescribed death benefit, and coverage will conclude.
An alternative to decreasing term insurance is to buy multiple term life insurance policies of different durations (e.g. one 30-year policy, one 20-year policy, one 10-year policy) all at once. In this way, if the insured dies soon, you collect on three policies, and if he/she dies late, you collect on only one or two. This plan approximates the behavior of decreasing term insurance but may incur less cost because it necessitate less administration.
